As the 2019 California Legislative Session has concluded, we look at the major tax bills that were enacted this year. The first is AB 147 (Burke) as Chapter 5. Because the bill contains an urgency clause, the measure took effect upon the Governor’s signature, which was April 25. The second is AB 91 (Burke), Chapter 39. As an urgency clause statute, it took effect the day that Governor Newsom signed it, which is July 1. The third is SB 92 (Senate Committee on Budget & Fiscal Review) which was enacted as Chapter 34. This article examines the new laws’ major provisions.

AB 147 (Burke)

The bill, on and after October 1, 2019, provides that a marketplace facilitator is considered the seller and retailer for each sale facilitated through its marketplace for purposes of determining whether that marketplace facilitator is required to register with the California Department of Tax & Fee Administration (CDTFA) under the Sales and Use Tax Law.

The measure also provides that any marketplace facilitator that is registered or required to register with the CDTFA under the Sales and Use Tax Law and who facilitates a retail sale of tangible personal property by a marketplace seller is the retailer selling or making the sale of the tangible personal property sold through its marketplace for purposes of paying any sales taxes and collecting any use taxes.

For purposes of determining whether a marketplace facilitator has total combined sales of tangible personal property for delivery in California that would make it a retailer engaged in business in this state, the bill requires the marketplace facilitator to include all sales made on its own behalf and by all related persons and sales facilitated on behalf of marketplace sellers.

The bill provides a marketplace facilitator relief from liability for the tax on a retail sale in specified circumstances. Finally, the bill contains findings and declarations by the Legislature.

The bill adds Chapter 1.7 (commencing with Section 6040) to Part 1 of Division 2 of the Revenue and Taxation Code (CRTC) with the Marketplace Facilitator Act.^[1] The bill defines “marketplace,” “marketplace facilitator” and “marketplace seller.”^[2]

The bill also excludes a delivery network company as a marketplace facilitator for this chapter, and then defines “delivery network company,” “delivery network courier,” “delivery services,” “local merchant,” and “local product.”^[3] A marketplace facilitator is the seller and retailer and it is required to register with CDTFA.^[4] There is marketplace facilitator relief.^[5]

Existing law is amended to redefine “retailer engaged in business in this state” to including “any retailer that has substantial nexus with this state for purposes of the commerce clause of the United State Constitution and any retailer upon whom federal law permits this state to impose a use tax collection duty.^[6] It further species retailers who are included in this definition, which is not meant to be exhaustive.^[7]

The bill added two new sections to the Revenue and Taxation Code. The first new statute^[8] applies to “every retailer engaged in business in this state and making sales of tangible personal property” and shall collect the tax from the purchaser and give to the purchaser a receipt.^[9] This provision applies if the retailer’s sales during the prior twelve months in excess of $1 million.

In addition, the new law allows CDTFA, in its discretion, to relieve a retailer engaged in business in California from penalties and interest so long as specified requirements are met.^[10] The relief that may be granted is for the period April 1, 2019 through December 31, 2022.

These new provisions added to the Revenue and Taxation Code do not have any retroactive effect.^[11] And the provisions of the state Administrative Procedure Act do not apply to any rules or guidelines issued by CDTFA before January 1, 2021. The bill is an urgency clause^[12] statute so that it took effect immediately upon signature by the Governor.^[13]

AB 91 (Burke)

This act is to be known and may be cited as the “Loophole Closure and Small Business and Working Families Tax Relief Act of 2019.”^[14]

It expanded the state’s Earned Income Tax Credit (EITC) in modified federal conformity. For the period January 1, 2019 to December 31, 2019, it sets the amount of the EITC. After January 1, 2020, and until the state’s minimum wage hits $15 per hour, there are revised calculation factors to be recomputed annually for eligible individuals.^[15]

The law also allows a refundable young child tax credit effective January 2, 2019 for $1,176 times the earned income tax credit adjustment factor, capped at $1,000 for each qualified taxpayer each tax year. It also states a public purpose and requires annual reporting by the FTB and it allows FTB to adopt permanent regulations under emergency authority.^[16]

The bill amends the ABLE Act to exclude income distributions used for qualified disability expenses by a beneficiary and conforms to changes relating to ABLE accounts made by the2016 Act. It also allows Section 529 accounts to roll over to ABLE accounts.^[17]

It excludes from an individual’s gross income the amount of student loan indebtedness discharged after December 31, 2011 due to death or disability of a student.^[18]

It also conforms to the federal TCJA to disallow or limit the amount that specified taxpayers may deduct for the premiums paid for an assessment by the FDIC depending on amount of total consolidated assets of the taxpayer.^[19]

For the denial of the deduction for employee compensation in excess of $1 million, it conforms to the TCJA to revise the definitions of covered employee and publicly held corporation to limit the amount specified taxpayers may deduct for ordinary and necessary expenses. It also disallows the performance-based compensation and commission exceptions regarding the deduction limitation for covered employees.^[20]

Effective January 1, 2019, the bill disallows net operating loss (NOL) carrybacks.^[21]

It conforms to the federal TCJA to allow a small business to use the cash method of accounting if its average annual gross receipts for the 3 taxable years do not exceed $25 million (California law previously provided a limit of $5 million) effective January 1, 2019 and taxpayers cab elect to have conformity apply to tax years after January 1, 2018. ^[22]

It conforms to the TCJA to exempt a corporation engaged in farming that has average annual gross receipts for the 3 taxable years ending with the prior tax year not exceeding $25 million from computing its taxable income by using the accrual method of accounting (California law provides a limit of $5 million) effective January 1, 2019. Taxpayers can elect to have conformity apply to tax years after January 1, 2018 and it also conforms to suspense allowances.^[23]

It conforms effective January 1, 2019 to the TCJA that exempts a taxpayer with average annual gross receipts for the 3 taxable years ending with the prior taxable year of $25 million or less from provisions that preclude the deduction of certain direct and indirect costs and determine whether those property costs are inventory costs or are capitalized (California law provides a limit of $10 million). Taxpayers can elect to have conformity apply to tax years after January 1, 2018.

The new law conforms to the TCJA effective 1/1/19 to exempt a small business with average annual gross receipts for the 3 taxable years ending with the prior taxable year not exceeding $25 million from the provisions that require a taxpayer to take inventories to clearly determine their income (CA law does not allow an exemption, but only to the requirement that taxpayers take inventories).^[24]

The bill also conforms to the TCJA effective January 1, 2019 to exempt construction contracts entered into by taxpayer with average annual gross receipts $25 million or less from the requirement that the taxable income from a long-term contract be determined by the percentage of the completion method (California law provides a limit of $10 million) and taxpayers can elect to have conformity apply to tax years after January 1, 2018.^[25]

In modified conformity to federal law effective January 1, 2019 (and with no sunset date), excess business losses of a noncorporate taxpayer are not allowed as a deduction and instead those losses must be carried forward and treated as a net operating loss in future taxable years.

It conforms to federal law for the 2018 tax year regarding the termination of partnerships by the sale or exchange of 50% or more of the interest in a partnership within a 12-month period.^[26]

The law conforms to the TCJA to limit the exclusion to the recognition of any gain or loss on the exchange of real property held for productive use in a trade or business or for investment if that property is exchanged solely for property of a like-kind that is to be held either for productive use in a trade or business or for investment, unless an exception applies.^[27]

It also prohibits a separate state election when a purchasing corporation makes an election that its qualified stock purchase from a target corporation may be treated as an asset acquisition resulting in a step up in the basis of the stock.^[28]

The bill contains a finding and declaration for partnerships to receive the same treatment as a partnership for federal tax purposes with respect to partnership technical terminations that reduce federal and state differences on the tax returns of the partnerships and its partners and does not constitute a prohibited gift of public funds.^[29]

The bill contains a finding and declaration that providing ABLE account beneficiaries the ability to contribute their own earnings to the ABLE account up to the federal poverty level and allowing Section 529 plans to roll over to ABLE accounts eliminates differences in the qualification criteria for ABLE accounts under federal and state tax laws and does not constitute a prohibited gift of public funds.^[30]

The bill contains a finding and declaration that allowing taxpayers to make an election in order to receive the same treatment for California tax purposes as the taxpayer receives for federal tax purposes with respect to the taxpayer’s accounting method for an entire taxable year does not constitute a prohibited gift of public funds.^[31]

The bill contains a finding and declaration that the General Fund will provide over $1 billion to schools due to this bill.^[32]

The law takes effect immediately as an urgency statute.^[33]

SB 92 (Budget & Fiscal Review Committee)

Until January 1, 2030, the Office of Tax Appeals must establish a process by which a person filing an appeal may opt to appear before one ALJ, rather than a tax appeal panel when the total amount in dispute is less than $5,000 for personal income taxes or the entity filing the appeal has less than $20 million in gross receipts and the total amount in dispute is less than $50,000. An ALJ’s decision does not have precedential effect.^[34]

From January 1, 2020 to January 1, 2022, there is an exemption from the sales and use taxes on the gross receipts of diapers for infants, toddlers and children, as well as menstrual hygiene products, which are defined as tampons, sanitary napkins, menstrual sponges, and menstrual cups. Department of Finance is required to estimate revenues that would have been raised and transferred to the Local Revenue Fund but for this new exemption.^[35]

The bill allows a delivery network company to elect to be deemed a “marketplace facilitator” and revises those actions taken by newspapers, internet websites and other entities that are excluded from the act of facilitating a sale as a marketplace facilitator.^[36]

It limits the issuance of a deficiency determination to a “qualifying retailer” to only those liabilities arising under the law for sales made on or after April 1, 2016. It defines a “qualifying retailer” to be a retailer that is or was engaged in business in California solely because the retailer used a marketplace facilitator to facilitate sales for delivery in California and for which the facilitator stored the retailer’s inventory in this state.^[37]

A qualifying retailer is relieved of the penalties imposed under the law regarding sales made from April 1, 2016 through March 31, 2019 and the bill makes a finding and declaration that the measure does not constitute a gift of public funds.^[38]

District use tax ordinance provisions are operative on April 25, 2019, rather than April 1, for retailers engaged in business in a district authorized to adopt district transactions and use ordinances.

It declares that the bill takes effect immediately as a bill providing for appropriations related to the budget bill.^[39]

In terms of the estimated fiscal impact of the bill, according to the Senate Budget and Fiscal Review Committee, the sales and use tax exemptions provided reduce General Fund revenue by approximately $17.5 million in 2019-20 and $35 million in subsequent years.